The Control and Accountability of Public Enterprise

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The Control and Accountability of Public EnterpriseKen Rasmussen Faculty of Administration January 28, 2004

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Control and Accountability DefinedControl: capacity to make certain things happen or to prevent certain things from happening In a democracy control is exercised by government on behalf of citizens, but citizens do not have any one particular interest, they have multiple and conflicting desires. Accountability an ambiguous term; -Literally accounting for the resources in your care -Reporting on your performance -Explaining what had been done with the authority delegated -The imposition of sanctions for poor performance

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Accountability of Private CorporationsThere are two types of accountability 1) the corporation to the market The market holds a firm accountable by the force of competition. If input and output markets are highly competitive the corporation can not exploit is customers, supplier or employees. 2) the managers to the share holders Share holders elect board of directors who then hires manager. Shareholders have a number of ways of holding managers accountable, sale of shares, capital markets etc, In general there are more means by which shareholder can constrain the behaviour or mangers, than are available to the ultimate owners of Crowns.

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Does Ownership Matter?It matters when government uses their firms to achieve social/policy objectives. It also matters when government ownership confers special privileges such as immunity from taxes and competition laws. Government is a unique owner in that it has law making power over both private firms and its own Mangers are given various types of incentives Managers of a Crown may be rewarded for carrying out directives even if they increase the corporations cost and reduce its profits.  Managers of private firms will be eventually replaced if they do not maximize profits and shareholders interests.

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Accountability and ControlMechanisms of the government Setting objectives and mandate multiple goals, often conflicting Trade-offs between goals is never specified Changing goals make it difficult to measure the Crown’s’ performance over time.  Appointment of Director Minister recommends to cabinet who should become a director The autonomy of directors is based on the desires of cabinet Appointment of president/CEO, prerogative of the Board, but minister and even cabinet will get involved.

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Accountability and ControlAuthorisation of major financing, government guaranteed debt has to be approved by cabinet Review of business plans, Review of capital budgets  Little agency problem between cabinet and managers? Bigger problems between ultimate owner and cabinet ministers

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Key Features in Sask-Each Crown reports to a single minister -The Cabinet is the regulator of public utility -CIC holds the shares. Directors of CIC are cabinet ministers. CIC focuses on strategic decisions, capital expenditures, financing dividends policy and inter-crown redistribution -Appears before the Legislative Committee on Crown corporations Annual report tabled in the legislature

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Accountability in PracticeHow do citizens hold Crown’s accountable Monopolies give you little market power Talk to MLA, who may be an opposition Vote against the government  What the ultimate owners cannot do is shell their shares buy more shares vote for or against the management at the annual general meeting organise a hostile tender offer to gain legal control

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Citizens and Property RightsCitizens face information or transaction costs Ownership rights cannot be bought or sold Involuntary take-over of Crowns is impossible Profits are used by politicians to reduce prices or extend served to uneconomic areas or cross subsidise favoured customers Difficult to pay bonuses to managers, thus you get poor quality of managers, or end up providing different kinds of benefits. Other constituencies might have more power in certain forms like employees, customers, and suppliers of inputs.

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Principle Agent ProblemPrinciple agent problems in Crowns are much worse than in private businesses. there is a layer (cabinet) between the owners and the corporations performance of crown are judged against multiple and changing objectives Difficult to structure contracts with top managers of Crown corporations to create strong incentives for them to achieve the owners purposes. Large cash bonus are politically unacceptable

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Different Types of CrownsVary greatly in terms of size, public policy purposes, and demands for financial support The Financial Administrative Act (FAA) categorises Crown corporations on the basis of their dependency on appropriations from Parliament Corporations operating in commercial and frequently competitive environments are expected to earn profits and provide a return on the public's investment. These corporations are normally not dependent on government appropriations and are listed in Schedule III, Part II of the FAA. Examples the Canada Post Corporation.

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Different Types of CrownsOther corporations that depend on appropriations for operating purposes are listed in Schedule III, Part I of the FAA Examples include the Canada Mortgage and Housing Corporation, the National Gallery of Canada, the St. Lawrence Seaway Authority and the Farm Credit Corporation. In addition, certain other Crown corporations are not scheduled under the FAA and are not subject to the control and accountability provisions outlined in Divisions I to IV of Part X. These corporations generally have a public policy mandate of a cultural nature and depend on appropriations from the Crown. These include the Canadian Broadcasting Corporation and the National Arts Centre Corporation. The exempt corporations follow the control and accountability regime outlined in their specific legislation and many of them have chosen to adopt a number of key accountability provisions of Part X of the FAA

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Classification of Federal CrownsThe federal government has four schedules which describe the type of accountability regimes for crown corporations. Schedule A lists all the operating departments Schedule B CI and CII list those entities known as Crown corporations Schedule B lists Crowns that perform administrative, research, supervisory advisory or regulatory functions For purposes of the FAA, these corporations are treated as regular departments of government Responsible ministers exercise the same continuous control as they do over government departments

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Classification of Federal CrownsSchedule CII list those that are expected to be financially self-sustaining and that compete directly with the private sector Schedule CI lists all those that fall neither in Schedule B or in Schedule CII  A single set of controls on corporate decisions making would not reflect the diversity among all three categories and therefore the legislation provides for flexibility in several ways. 

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Classification of Federal CrownsThe FAA also allows for corporations to move from one part to another part depending on restructuring and new mandates. Also allows for directive power to be exercised by cabinet

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Budget Controls in FAABudget Controls: Schedule B are financed by annual appropriations through the normal budget process in the same way as departments Schedule CI corporations must submit both capital and operating budgets for the approval of the appropriate minister and TB Schedule CII corporations must submit only capital budgets.

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Budget ControlsSubmitting a capital budget serves two purposes for the government it provides government with the information on the projected capital investments, their planning building and the basic assumptions underlying those projects approval of the capital budget provides authority to make expenditure commitments for future years. Once it is approved the summary of the capital budget will be table in Parliament  Operating and capital budgets must cover all the activities of the parent corporation and all of its wholly-owned subsidiaries.

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The Role of Board of DirectorsBoards represent unique challenges challenges result from a need for heightened sensitivity to the corporation's public policy objectives and its connection to the Crown Effective boards of directors are critical to the good management of corporations A board of directors helps to separate ownership from day-to-day management by providing a key link between the Crown and the executive officers A strong board of directors is essential if the corporation is to fulfil the objectives established for it Through the power conferred on them, boards of directors oversee the management of the businesses, activities and other affairs of the corporation.

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The Role of Boards of DirectorsMust be familiar with the corporation and its management Must establish the corporation's strategic direction Must monitor performance, and by reporting to the government  Do not normally involve themselves in day-to-day management 

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The Role of the Board of DirectorsMust be sensitive to the mandate of the corporation as expressed to it by Parliament Sensitive to fact that the corporation is part of the federal government. Boards of directors of oversee the corporation on the Crown's behalf by holding management accountable for the company’s performance, its long-term viability and the achievement of its objectives.

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Federal Guidelines for Directors Approving strategic plan Risk identification and management’ Succession planning Ensuring an adequate information management system Examine periodically the public policy objectives and legislative mandate Ensure effective communications with government Develop working relationship with management Guard the independence of the corporation

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Federal Guidelines for DirectorsPeriodically assess the performance of CEO Periodically assesses its own effectiveness Ensure that directors have the orientation and education to ensure their responsibilities Review the compensation of board members Developed a corporate approach to governance

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The Role of ParliamentParliament has an important role It legislates with respect to the creation, dissolution or privatization of a parent Crown corporation. Legislates the general governance of Crown corporations and the allocation of public funds to individual Crown corporations. Important documents relating to the operations and the performance of each Crown corporation are tabled in both Houses of Parliament. These documents include annual reports and summaries of corporate plans and budgets. The President of the Treasury Board annually tables in Parliament a consolidated report on all Crown corporations entitled Crown Corporations and Other Corporate Interests of Canada.  

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The Role of CabinetExecutive authority is exercized by cabinet The Cabinet comprises the Prime Minister and the other ministers of the Crown appointed by the Governor General to form the Government Cabinet has overall responsibility for the formulation of the government's priorities and policies. Crown corporation annual corporate plans require Cabinet approval prior to implementation. This approval represents the Cabinet's endorsement of the responsible minister's recommendation of the particular Crown corporation's business plan

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The Role of CabinetAppointments to key positions in Crown corporations require cabinet approval. Directors appointed by the minister(cabinet approval) The Cabinet fixes the rate of remuneration for the directors, the chairperson, and the chief executive officer (CEO) of each parent Crown corporation  Annually, the board of directors evaluates the performance of its CEO and makes a recommendation to the minister on the rate of remuneration for the following year and on any performance compensation. The minister then forwards the recommendation to the Cabinet or consideration and approval

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The Role of the PMO and PCOThe PMO and PCO each have a role in cabinet appointments The PMO is actively involved with the appointment of chairpersons, CEOs and directors of Crown corporations The PMO provides political advice to the Prime Minister on appointments to be made on his or her recommendation. Ministers consult with the PMO when developing their recommendations on cabinet appointments.

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Last Updated: 8th March 2018